Folding your Cards

On the surface, poker seems like it is a game about cards, and on the surface it is.

However, you don’t need to get much below surface-level to see that poker is primarily a game about the behaviour of the other players. The player on your right just put in a big bet: Does he have a big hand? Is he bluffing? What does he think you have, and how does he think you will respond? Given what he might have and what he thinks you might have, if you put in a huge re-reraise, how will he respond?

The key characteristic of a poker game is limited information.

Neither player knows the other players face-down cards, but each can guess based on the other player’s behaviour.

So, while neither player knows exactly where they stand, they have cues from the patterns of betting within this hand, from the patterns of betting in past hands, and from any “tells” they can pick up by observing their opponent carefully.

As in poker so in investing you have limited information from which you draw probabilistic cues on how to proceed further.

A company’s business, demand for its products, past performance of the management, future for the business is information available for most of the good companies.

However, future is uncertain, at the start of 2020 calendar year nobody knew the world will be turned upside-down.

No-one is aware of the kind of issues that can come in short-term to disrupt your journey.

So, you are working with a lot of hindsight bias in an uncertain environment.

This is what makes investing interesting.

Exit Decision

In discussion with most of the investors, one question often comes up-how do I decide when to sell a stock?

Micro Reasons

These are stock specific reasons which could prompt a sell decision.

Let’s learn from the best:

Warren Buffett mentioned two main reasons he’ll sell a stock.

  • The first is when he feels Berkshire needs the money for a more attractive opportunity. “We would sell if we needed money for something else — I would reluctantly sell something terribly cheap to buy something even cheaper,” said Buffett. 
  • The second, and more common, reason Buffett sells stocks is because of changing fundamentals, or a changing competitive landscape.

For example “We think McDonald’s has a fine future, we think Disney has a fine future, and there are others. But we don’t think their competitive advantage is as strong as we thought it was when we initially made the decision”.

Here are some instances of when Buffet some of his holdings

IBM- Original thesis no longer applicable; Buffett says he misjudged IBM’s competitive challenges, and as a result, it has revalued the stock lower.

Wells Fargo-To remain under regulatory limit of 10%

Freddie Mac– The company was taking on far too much risk to keep its earnings growing at a double-digit rate.

Exxon Mobil– However, Buffett realized that oil prices weren’t likely to stay as high as he originally thought, so Berkshire’s entire stake was abruptly sold.

Goldman Sachs– To  raise capital for the pending Precision Castparts acquisition.

Bad reasons to sell

To be thorough, there are some bad reasons to sell a stock that investors should avoid. These include, but aren’t necessarily limited to:

Because the stock’s price plunged 

Because the stock’s price increased sharply

Because a billionaire sold

Rebalancing Conundrum

When the market does well, your stated asset-allocation changes in favour of the asset that’s out-performing.

There are always 2 options available to an investor:

  • Sell high-performing investments and buy lower-performing ones.
  • Allocate new money strategically. For example, if one stock has become overweighted in your portfolio, invest your new deposits into other stocks you like until your portfolio is balanced again.

I  prefer the second option because rebalancing in the “traditional” way — without investing any additional money — requires you to sell your highest-performing assets.

I am generally fan of the second option since rebalancing by contributing new funds enables you to leave your winners alone to (hopefully) continue to outperform.

The crucial steps to consider are

  • Re-balancing or the decision to sell a performing holding is not a blind robotic exercise; it requires careful consideration of why?
  • Review the portfolio for winners and losers from the perspective of reasons you first bought them rather the price at which they are trading or profit/loss that you have made
  • If there is a change in fundamental of the business or your thesis is not working or you have a better deployment opportunity, consider selling out and re-deploying;

Remember more than “Knowing” what’s important is to “Know why

For guidance contact on manish.verma@manishverma.co.in or +919920741569

Follow my twitter handle irreverentinvestor.com @manver1974 for more such shares

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